July was a vicious month for anything related to the AI boom. The epicentre of this being the global semiconductor market. Think Korean chip companies like Samsung and SK Hynix, the latter lifted from financial market obscurity to a name that rolled off the tongue as being the most direct beneficiary of the AI Capex spend.
Between the launch of ChatGPT (late November 2022) and the end of June 2026, SK Hynix stock surged by approximately 3,118% on its primary South Korean exchange (KRX: 000660) as the company went from loss making to an operating profit of over US$40b. In one quarter alone. Staggering. Unprecedented. Beggars belief. I've run out of superlatives.
I'm reminded of a quote from the 1995 movie ‘Seven’ (sorry, I'm a 90's generation person), where Brad Pitt's character asks a fellow detective played by Morgan Freeman: "Have you ever seen anything like this?".
In case you are wondering, no, I've not seen anything like this in my career.
The come-to-Jesus moment
And so, while the AI boom continues without showing any sign of slowing down, July was a come-to-Jesus moment for the stocks involved, with SK Hynix falling more than 50% peak to trough. Korean BBQ anyone?
Why did this happen, given the backdrop of an AI boom which hasn't yet rolled over?
Leverage. Retail investors from Gangnam to Wall Street were piling into the semiconductors like it was a one-way bet.
Risk? What's that? Via the use of margin loans from brokers and 3x leveraged ETFs they piled in. Goldman Sachs estimated that by 13 July more than 1.2m leveraged Korean retail trading accounts had received margin calls, of which 320,000–360,000 were forcibly liquidated. Accounts are not necessarily unique people, and this included leveraged equity accounts rather than only ETF holders. Goldman compared the 1.2m accounts with about 3.4% of Korea’s adult population!!
The fall of a Silicon Valley prodigy
Perhaps though, the biggest pied piper of them all was the now infamous Silicon Valley child prodigy, Leopold Aschenbrenner, whom I wrote about on LinkedIn recently.
The 24-year-old’s hedge fund (yes, that's right, he was even younger than I was when I started Pie), imploded at the end of July. Somehow, he was managing US$45b – unbelievable - and having made spectacular returns from his AI picks, didn't understand that investing carries risk.
With 400% leverage in his fund, attached to probably the most volatile sector in the market it was an accident waiting to happen. Clearly, he's not a disciple of Warren Buffett, otherwise he would have known the first rule of investing: don't lose money.
Let this serve as yet another lesson for those who require regular schooling. Leverage and finance, those marriages start well, but they always end in a very messy divorce.
How our funds fared
As you might imagine, our funds got whipped around during the month of July, as the volatility under the surface of the market was elevated, to say the least.
I've heard many in the industry describe the current environment as one of the hardest for investors in living memory. Volatility is constant, as are sector rotations, and the market is not rewarding skill in the same way it has in the past.
Returns ranged from -6.2% for the Australasian Emerging Companies Fund, despite the fund receiving a takeover offer for education provider Kip McGrath, to -0.5% for the Property & Infrastructure Fund which benefited from one of the aforementioned rotations, this time into ‘safe’ assets - giving you some idea of the dispersion of returns across the market.
Small caps: a tale of two markets
I’d like to point out to our investors at this point just how tough the Australian and New Zealand market has been of late, particularly for small companies.
The 6-month return for the Australian small companies’ benchmark is -14.3%. Whereas, the Russell 2000 US small cap index is up +12.2% over the same period. That's a difference of 26.5%. In 6 months! For what it’s worth, Australia looks pretty good value at these levels now.
The bull case still stands
I remain optimistic about AI, although I am prone to moments of despair about what the technology will do for the world.
However, I'm not sure if I share Elon Musk's utopian view from his recent Economist interview, where he said we won't need money in the future. He was also once quoted as saying you don't need to wear seatbelts in Teslas, if that gives you any guide to the type of flippant remarks he makes.
But in all seriousness, I think the AI bull still has plenty of room to run. July was just a washout, not the beginning of the end.
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